October 2, 2008

The New Normal for Credit Markets

I'm still in the wilds of Northern New England,  online for just a half hour or so in the morning, lagging by a day on the NYT, and getting most of my news from NPR.

Yesterday was the day for the Media to make the case that Main Street really IS in trouble if taxpayers don't make an income transfer from the bottom four quintiles to the top decile,  in the amount of $700 billion, off-budget, of course.  Only stuff like CHIPS is on budget.

Yesterday David Leonhardt. invoked the Depression, citing the experience of Fed Board member Frederic Mishkin's grandfather's experience.  He tried to make the case that there is some enormous risk for ordinary citizens that they just don't understand.  

He failed. Like all the other arguments we've heard, the mechanisms that will affect Main Street are left undefined, and the way in which purchasing toxic waste will "restore confidence" and open up credit markets are still unstated.

Closing graf:

But in the end, this really isn’t about Wall Street. It’s about reducing the risk that something really bad happens. It’s about limiting the damage from the past decade’s financial excesses. Unfortunately, there is no way to accomplish that without also extending a helping hand to Wall Street. That is where our credit markets are, and we need them to start working again.

“We are facing a major national crisis,” as Meyer Mishkin’s grandson says. “To do nothing right now is to do what was done during the Great Depression.”

The only evidence for this grave situation presented is that Wachovia went under.  Wachovia indeed went under, was bought out, and all depositors' money is safe.  All we seems to get from the "financial press" is hyperbolic restatements of the bailout backers.

On "public" (whole lotta advertising there) radio yesterday, there were two interesting stories.  The first was with local bank officials, who say they have been unaffected. As long as Fannie and Freddie are still in busines, one banker said,  his mortgage supply is unlimited, and his lending practices have not changed.  The president of Chittenden Bank pointed out that Vermont banks have continued to follow prudent banking practices, knowing their business customers, and staying away from mortgage securities. He anticipates no difficulties.

The second story had to do with the drying up of credit for consumers looking for loans.  This was a national story. The report said, echoing a New York Times piece from the day before, that people with sub-prime credit ratings were having a hard time getting an auto loan.  And. the report said, if your credit rating is bad, you may not be able to get a mortgage without a downpayment, of as much as "three to five percent."


This is something I actually found worrisome. It seems like the irresponsible practices of the last decade or so--of lending money to risky borrowers with inadequate collateral  is going to be established as the normal state of affairs. It seems insane, to me anyway, for a banker to make a long term loan funded by short term borrowing (demand deposits, savings accounts etc) without some substantial skin in the game from the borrower. If the "restoration of credit markets" means the resumption of making high risk loans, then our troubles are not going away any time soon.


Paul Dirks said...

I think you're thinking of Wall Street and Main Street but not thinking so much about Industrial Avenue. While I've been uncommited on whether I think the bailout is a good idea (I have neither the time nor the inclination...!) several discussion threads I've seen have convinced me that if we ARE in a credit crunch, it will be felt most strongly among manufactures and other concerns that rely on lines of credit for their operating expenses.

Consumer credit might remain unaffected but this could have a very noticable effect on employment going forward.

stuart_zechman said...

If home prices keep falling, and banks continue to balk at lending money for mortgages on houses whose value will inevitably drop, and then the pool of credit shrinks, and so the cost of mortgages increases, and therefore the pool of buyers shrinks, won't home prices then continue to plummet as sellers race to disgorge their near-foreclosure debts?

Shouldn't the Federal government:

A) lend ordinary people who are near foreclosure the money to stay in their homes until housing values stabilize


B) be empowered to re-write the terms of mortgages to reflect these realities (principle, interest, payment terms, rate adjustment, etc.)?

Why do we have to buy crazy debts from banks in order for them to lend money to us? Why don't we just lend ourselves money, at least until the downward spiral is over?

Paul Dirks said...

Based on the theory that a home that is occupied by an owner who is continuing to make mortgage payments he can afford is significantly more valuable than a home that is sitting empty and is being held by an institution that has no way of recovering its value except by selling it at a lowball price, I'd say that helping people refinance with non ridiculous terms would indeed be a good investment.